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After years of declining revenues, IBM finally surprised investors last quarter with numbers that at fist blush appeared good, but a deeper look revealed were very seriously massaged (as we disclosed at the time). Now, in its Q1 2018 earnings report, IBM has taken the pro-forma adjustments that it has become so well-known for, to a new level.

In the first quarter, the company reported non-GAAP EPS of $2.45, up 4% Y/Y and beating expectations of $2.42 (not to be confused with GAAP EPS as noted below). Revenue of $19.1 billion was also better than the expected $18.83 billion, and a 5% increase to the $18.2 billion reported last year. And, superficially, the revenue was great, posting the second straight quarter of growth after 5 years of declines, and the highest since Q3 2011:

Broken down, revenue was solidly higher across the board:

Cognitive solutions revenue $4.3 billion, up 6%

Global business services revenue $4.2 billion, up 4%

Technology services & cloud platforms revenue $8.6 billion, up 5%

Systems revenue $1.5 billion, up 8%

Even when looking at IBM's tax rate, where IBM traditionally engages in accounting magic, things appeared to be normalizing, as non-GAAP EPS actually rebounded to 16%.

All of the above was great news and would have sent the stock soaring. Only, it was not meant to be, because a closer look once again revealed a lot of dirty laundry.

First, while IBM did report 5% revenue growth Y/Y in Q1, this was if one excludes currency impact, something which IBM always says to include. And, as IBM disclosed in its report, revenue growth was actually 0% Y/Y when adjusted for currency.

Revenue in the units IBM calls “strategic imperatives,” which includes the company’s cloud, analytics and mobile-focused businesses gained 15% from a year earlier to $9 billion. Analysts had expected this to increase by 11%. Here too, however, all the growth was thanks to the weaker dollar: adjusted for FX, strategic imperatives would have seen only 10% growth instead of 15%.

Then going down the income statement reveals that gross profit actually declined Y/Y, dropping from 43.8% in Q1 2017 to 43.2% this quarter. Even on an adjusted basis, the profit margin was a debacle, printing at 43.7%, far below the 45.4% expected.

Continuing down the income statement showed a sharp jump in expenses, which resulted in income from operations actually declining from $1.424BN to $1.136BN, an EBIT margin of 6.0%, down from 7.8% a year ago.

And the punchline: while IBM reported that its non-GAAP tax rate was 16%, what actually happened is that in the quarter IBM got a $540MM benefit from income taxes, making the effective tax rate -47.5%!

Here is IBM's admission of what happened, deep in the small print:

IBM's reported GAAP and operating (non-GAAP) tax rates for the first quarter include a $0.8 billion discrete tax benefit. The company's reported GAAP tax rate also includes an additional provisional charge of $0.1 billion as a result of guidance issued in January 2018 by the Internal Revenue Service related to the enactment of the Tax Cuts and Jobs Act in December 2017. This charge is in addition to the provisional charge of $5.5 billion the company reported in its fourth-quarter 2017 earnings.

Finally, GAAP EPS was $1.81, which was a 2% drop Y/Y. What is ironic, is that for yet another year, IBM reported a decline in GAAP EPS coupled even as non-GAAP EPS once again increased Y/Y +4% to $2.45, if only in some IBM computer's excel spreadsheet. It certainly did not do so for the company. Meanwhile, both Operating Income and Net Income (both GAAP line items) declined.

How did IBM go from another painfully low GAAP EPS to the "beating" non-GAAP number? Why the usual accounting gimmickry that we have all grown to love from Ginni Rometti.

Finally, in yet another bizarre corporate decision, IBM announced that it generated Q1 free cash flow of $1.3 billion. Surprisingly, it returned almost double that, or $2.2 billion to shareholders through $1.4 billion in dividends and $0.8 billion in gross share repurchases. At the end of March 2018, IBM had $3.0 billion remaining in the current share repurchase authorization. As a result, the only reason why IBM saw its cash level increase was because of it added over $1 billion in debt.

In short: IBM once again tried to fool investors with a kitchen sink of adjustments and one-time items. Not this time though, as the market is now well-aware of IBM's endless gimmicks, and the stock has tumbled more than 5% after hours, approaching its 52 week low.